A hint of the dichotomy between 'big' and 'small' is contained in the Organisation for Economic Co-operation and Development's (OECD) leading indicators. These suggest that Brazil and China are faring poorly while Indonesia, South Africa, Poland and Mexico seem to have relatively brighter prospects. India, interestingly, has an OECD leading indicator which does not particularly point to slowdown risks, and this fits well with the earlier point that the chances of aggressive Indian monetary loosening have diminished.
Inflation expectations have also shifted up recently, albeit modestly, in a number of countries. Citi analysts note that expectations have risen in Chile, Colombia, Israel, Poland and Mexico; have stayed flat in Korea; and have fallen in Brazil.
Meanwhile, higher inflation expectations have helped to push up yields. Given all the factors discussed here - stronger data, cost-push pressures and rising inflation expectations, interest rate cuts are being priced out in a number of countries. And more recently, this rise in EM yields has been given an additional push by the rise in US yields. Considering that EM yields have generally been sensitive to US yields, any further upward pressure on US yields is likely to maintain pressure on many rates markets in EM.
The bottom line is that EM interest rate markets and monetary policy are likely to remain data-sensitive, and sensitive to both the US and China. For the small countries, upward pressure on inflation expectations seems to be the order of the day. One risk to this view is the market's capacity to be shocked by weak Chinese data. Since Citi analysts think that China's willingness to loosen policy may be postponed until weaker data become more apparent, China might present the biggest source of policy uncertainty for EM at the moment. The direction of policy seems clear there, but not the timing.